Will The Royal Commission Restore Trust, Certainty and Confidence in our Banking System?

That was the hope expressed during Westpac’s AGM held last Friday. It was interesting to hear from both Chairman and CEO on the upcoming Royal Commission.

Westpac chairman Lindsay Maxsted said

it is our hope that, ultimately, the newly announced royal commission will play a role in restoring trust, respect and confidence in Australia’s already strong financial system.

But, given the multiple inquiries which have run over recent months,  Westpac consistently argued that further inquiries into the sector, including a royal commission, were unwarranted.

He did concede that there had been some instances where the banking sector had failed to meet customer expectations and banks had underestimated the subsequent backlash from customers, regulators and the government.

CEO Brian Hartzer said

We are embracing the royal commission as a way to finally draw a line in the sand on calls for inquiries.

and asserted that the banks have “been a political football for too long”.

That’s why we have now accepted the need for a royal commission to create certainty and confidence in our banking system.

So, it is worth noting that the scope is still being wrangled, and the process will take at least a year. It is also has a broad set of terms, spanning not just the banks. Yes, the  announcement may ease the political debate, but that is not the end of the matter.

If past inquiries are any measure, there will be steady coverage as it progresses, and depending on the findings, it may, or may not rebuild confidence.

It seems to me that there can be no guarantees – and we still await the outcomes of the Productivity Commission on vertical integration, and ACCC on mortgage pricing.

So we think the outlook for the banks remains, at least, cloudy!



Westpac Cuts Mortgage Rates For New Borrowers

Westpac has announced a series of mortgage rate cuts to attract new borrowers, as it seeks to continue to grow its portfolio, leveraging lower funding costs, and the war chest it accumulated earlier in the year from back book repricing, following APRA’s tightening of underwriting standards and restrictions on interest only loans.

From Australian Broker.

Westpac and its subsidiaries have announced a number of rate cuts on select fixed rate mortgages for a limited time.

The changes will bring in lower rates on owner occupier and investor products and increase the introductory discounts on certain loans.

From last Friday (1 December), St George, Bank of Melbourne and BankSA have brought in the following rates for new lending:

Current Advantage package rate (p.a.) Change (p.a.) New promotional rate (p.a.)
2 year fixed owner occupier Principal & interest 3.85% -0.06% 3.79%
Interest only 4.24% -0.15% 4.09%
2 year fixed residential investment Principal & interest 3.99% -0.10% 3.89%
Interest only 4.49% -0.40% 4.09%
3 year fixed owner occupier Principal & interest 3.94% -0.05% 3.89%
Interest only 4.34% -0.15% 4.19%
3 year fixed residential investment Principal & interest 4.19% -0.20% 3.99%
Interest only 4.49% -0.30% 4.19%

Basic owner occupier principal & interest promotional rates have also been reduced across Westpac’s subsidiaries as follows:

Basic owner occupier P&I Old rate (p.a.) Change New rate (p.a.)
St George 3.78% -0.10% 3.68%
Bank of Melbourne 3.78% -0.14% 3.64%
BankSA 3.78% -0.14% 3.64%

Westpac itself also brought in a number of changes, effective from 4 December on new lending, by increasing the two-year intro discounts on its two and three year fixed option home and investment property loan rates.

Product Repayment Current rate (p.a.) Change Promotional rate (p.a.) Promotional comparison rate (p.a.)
2 year Fixed options home loan P&I 3.88% -0.09% 3.79% 4.86%
IO 4.39% -0.30% 4.09% 5.38%
Fixed rate investment property loan P&I 4.19% -0.30% 3.89% 5.31%
IO 4.59% -0.50% 4.09% 5.75%
3 year Fixed options home loan P&I 3.99% -0.10% 3.89% 4.82%
IO 4.49% -0.30% 4.19% 5.32%
Fixed rate investment property loan P&I 4.24% -0.25% 3.99% 5.23%
IO 4.59% -0.40% 4.19% 5.64%

The bank has also increased the two-year offer discount on its flexi first option home for principal and interest repayments from 0.84% p.a. to 1.00% p.a. putting the current two-year introductory rate at 3.59% p.a.

A Westpac spokesperson said the bank was pleased to launch these competitive rates for new lending across the group to support Australians purchasing a new home in a responsible manner.

“We know many Australians begin thinking about purchasing a new home as the year draws to a close and they look ahead to the new year and a fresh start.”

Westpac capital requirements increased after breaching regulatory obligations

The Reserve Bank in New Zealand says that Westpac New Zealand Limited (Westpac) has had its minimum regulatory capital requirements increased after it failed to comply with regulatory obligations relating to its status as an internal models bank.

Internal models banks are accredited by the Reserve Bank to use approved risk models to calculate how much regulatory capital they need to hold. Westpac used a number of models that had not been approved by the Reserve Bank, and materially failed to meet requirements around model governance, processes and documentation.

“This is very disappointing. Operating as an internal models bank is a privilege that requires high standards and comes with considerable responsibilities. Westpac has not met our expectations in this regard,” Reserve Bank Deputy Governor and Head of Financial Stability Geoff Bascand said.

The Reserve Bank required Westpac to commission an independent report into its compliance with internal models regulatory requirements. The report found that Westpac:

  • currently operates 17 (out of 35) unapproved capital models;
  • has used 21 (out of 32) additional unapproved capital models since it was accredited as an internal models bank in 2008; and
  • failed to put in place the systems and controls an internal models bank is required to have under its conditions of registration.

The Reserve Bank has decided that Westpac’s conditions of registration should be amended to increase its minimum capital levels until the shortcomings and non-compliance identified in the independent report have been remedied.  Westpac’s minimum capital ratio requirements will be 6.5 percent for Common Equity Tier 1 capital, 8 percent for Tier 1 capital and 10 percent for Total capital, with the additional 2.5 percent capital conservation buffer applying.  Currently, for all other locally incorporated banks capital ratios are set at, respectively, 4.5 percent, 6 percent and 8 percent, plus the 2.5 percent buffer.

In addition, the Reserve Bank has accepted an undertaking by Westpac to maintain its total capital ratio above 15.1 percent until all existing issues have been resolved.  The Reserve Bank has given Westpac 18 months to satisfy the Reserve Bank that it has sufficiently addressed those issues or it risks losing accreditation to operate as an internal models bank.

“We believe the regulatory action is appropriate given the seriousness of Westpac’s non-compliance and the need to protect the integrity of the capital regime,” Mr Bascand said.

The Reserve Bank has taken into account that Westpac has not deliberately sought to reduce its regulatory capital. While there have been serious shortcomings and  non-compliance, it appears that Westpac has remained well above its required regulatory capital levels.

Westpac has confirmed that it does not dispute the findings of the independent report, that it is committed to remedying all the issues identified, and that it will maintain its total capital ratio above 15.1 percent.

CBA and Westpac launch facial recognition on the iPhone X

Commonwealth Bank says it is the first Australian bank to offer customers secure access to their accounts using Face ID, the facial recognition technology built into Apple’s new iPhone X.

iPhone X users will be able to use Face ID to securely log-in to the CommBank App.

“Our customers use secure fingerprint logins on the CommBank App about 30 million times a month,” said Pete Steel, Commonwealth Bank Executive General Manager of Digital.

“Extending that functionality to Face ID is part of our ongoing work to provide a better banking experience to our customers through simple, easy and secure features.”

Face ID is one of the most secure ways to log into an account because it performs in-depth mapping of an individual’s face using more than 30,000 points of reference. These include the spacing between, and shape of, facial features.

“While we strive towards convenience and ease of use, we don’t implement new technology without being able to guarantee security for customers,” he says.

Westpac has subsequently also announced a similar facility.

This despite neither banks offering Apple Pay.

Westpac FY17 Up 3%; Margin Down – Banking on Property

Westpac has released their FY17 results. They are literally banking on property. They do not expect home prices to fall significantly and they expect mortgage lending to continue to grow.

Statuary net profit was $7,990 million, up 7% on 2016, and cash earnings up 3% to $8,062.

This is a bit lower than expected, impacted by lower fees and commission, pressure on margins, the bank levy and a one-off drop to compensate certain customers.  Despite strong migration to digital, driving 59 fewer branches and a net reduction of ~500 staff, expenses were higher than expected. There has been a 23% reduction in branch transactions over the past two years in the consumer bank. Treasury had a weak second half.

Around 70% of the bank’s loan book is one way or another linked to the property sector, so future performance will be determined by how the property market performs.

Provisions were lower this cycle, and at lower levels than recent ANZ and NAB results. WA mortgage loans have higher mortgage arrears.

The balance sheet is strong on all the critical ratios. They are “essentially done” they say.

Cash earnings per share is up 2% to 239.7 cents and the cash return on equity is 13.8%. There was no change to the dividend.

Net interest margin was 2.09%, 4 basis points lower, compared with FY16, reflecting higher wholesale funding costs, bank levy and some asset repricing. The bank levy cost $95m pretax, or 2 basis points, or 2 cents per share.

Margin improved in the second half, thanks to loan repricing and improved wholesale funding. Mortgage repricing contributed 7 basis points in 2H17.

The cost of refunding customers who were entitled to certain product discounts, but may not have been aware that they needed to specifically request them was $118 million this year, equivalent to 1.5% of earnings. This is a one-off hit.

Non-interest income was down 9%, with $209m fall in trading income and $97 million in fees and commissions.

Growth in the consumer bank (mainly mortgages) was the strongest.

Costs were up 2% to $4,604 million, and the expense ratio 42%, including productivity savings of $262 million. They still want to get below 40%, eventually. Compliance costs rose.

Total provisions fell from $3.6 billion in 2016 to $3.1 billion in FY17.

Impaired assets to gross loans were down 10 basis points to 0.22%. Their impairment charge was was down 24% over the year to $853 million, which equates to 13 basis points, down 4 basis points on last year.

Westpac is a significant property aligned bank with 62% of the loan book related to Australian mortgage lending, which showed strong growth, with net flows of $13 billion in 2H17. There were more fixed rate loans, and less interest only loans. The value of the book was up 3% in the 2H17, to $427.2 billion.  Mortgage offset balances are $38.1 billion.  Commercial property lending is 6.48% of total lending, or $49.6 billion. So overall property exposure is close to 70% of the bank! $6.9 billion are in the residential apartment sector. Inner city consumer mortgages for apartments is $14.1 billion.

They reported $18.6bn of switching from IO to P&I mortgages in 2H17.

Investor loans lending is growing and is 46.8% of flow, and 39.8% of the portfolio. Around 54% of mortgage flows are via proprietary channels, while the portfolio sits at 57%. So broker flows have lifted to 46%.

WA delinquencies remain higher than other states, but are falling slightly. Westpac says they think delinquencies in WA have peaked.

There are more properties in possession in QLD than WA, mostly in regional mining areas.

This data on vacancy rates highlights the issue with investment property in WA!

The CET1 ratio is 10.6%, above the APRA target.

In FY18, they expect lower lending growth (but they think mortgages will still grow), margin will be impacted by more mortgage switching from interest only to principal & interest and there will be a $50m headwind from ATM and transaction fees. They will target cost savings of 2-3% and await the final APRA guidance on capital weights and mortgages.

Westpac tightens up on responsible lending

From Australian Broker.

Westpac has brought in a number of responsible lending changes affecting how brokers enter in requirements and objectives (R&O) questions for clients.

“As a bank, Westpac is committed to responsible lending and meeting our conduct obligations under the National Consumer Credit Protection Act. Requirements and Objectives are a part of our responsible lending obligations,” the bank wrote in a note to brokers on Monday (30 October).

Effective from 14 November, brokers will be required to complete additional R&O questions and declarations for clients taking out certain loan types including but not limited to:

  • Fixed interest loans
  • Loans requiring lenders’ mortgage insurance
  • Loans with interest only repayments
  • Line of credit loans
  • Loans for refinancing or debt consolidation

The questions are designed to help brokers understand their client motivations, align the products to their needs, and prompt brokers to explain consequences around each choice of product to the client.

Additional R&O questions will also apply for each applicant of the loan, including for clients with foreseeable changes, special circumstances, current financial hardship, or those approaching retirement age.

“Westpac Group takes its responsible lending obligations seriously and is committed to ensuring good outcomes for our customers across first and third party lending,” Tony MacRae, general manager of third party distribution at Westpac, told Australian Broker.

“We’ll be working closely with all brokers over the coming months to support them with this new way of working – many had already adopted this approach and have been working this way for some time.”

From 8 January 2018, changes to submitted loan applications will no longer be accepted by email and will instead have to be completed through ApplyOnline.

“This will ensure that the correct R&O are captured accurately for all applications submitted and resubmitted and there is a central location that incorporates all the R&O information that has been discussed between yourself and the client with documented evidence of any loan changes,” the bank said.

Westpac Reveals ‘PayWear’ Wearable Payment Technology

Given the stalemate with Apple Pay, it is interesting to see the recent announcement that Westpac customers will soon be able to tap-and-pay hands-free with the announcement of a new wearable payment option, ‘PayWear’.  “Westpac PayWear uses the same contactless payment technology as your Debit Mastercard®. You simply tap the accessory wherever contactless payments are accepted and the transaction will be debited from your everyday bank account”.

Westpac 'PayWear'

PayWear Essentials, available early December, includes a silicone band and a ‘keeper’, which can be easily attached to an existing watch or fitness band, containing a microchip (PayWear Card) linked to the customer’s everyday transaction account.

Customers can tap and pay in the same way they regularly do with their debit card, without having to reach for their wallet or smartphone, through the new range of waterproof and battery-free wearable accessories.

Westpac Group Chief Executive, Consumer Bank, George Frazis said customers across the country embrace greater convenience and expect to be able to simply tap-and-pay.

“Australia has the highest contactless penetration in the world, and cards continue to replace cash as consumers demand convenience. We’re always looking for new ways to help make our customers’ lives easier, and with our new PayWear products, customers will be able to pay on-the-go, in one hands-free step.

“With PayWear, there is no need to search through a bag, login to an app or worry about battery life. It will be on the go with our customers and ready for use when they are.

“When speaking with customers, personal style and choice were important. In fact, 70% agreed that they would only wear a wearable device if it suited their own personal style and lifestyle. This is why we will collaborate with iconic Australian designers to create a variety of wearable accessory designs to suit different tastes, preferences and styles,” Mr Frazis said.

The first Australian designer to be announced, who will design a range of unique products for Westpac PayWear, is award-winning surfboard shaper and entrepreneur, Hayden Cox of Haydenshapes. A range of leading Australian designers will be hand-picked to speak to a wide mix of everyday Australians – from surfers and fitness fanatics, to busy parents, professionals and festival-goers.

Hayden Cox says the opportunity to collaborate with Westpac has been a natural fit when it comes to designing products that are innovative, functional and stylish.

“Functional design is something I’ve always been passionate about – particularly technology and products that improve experiences for people. It was this passion which led me to creating and filing a patent on my parabolic carbon fibre surfboard construction, FutureFlex, and wanting to uniquely design my product to improve the surfing experience.

“Working with Westpac to create an exclusive range of wearable accessories which evolve the way people make contactless payments is exciting to me. This product signals an inevitable and innovative progression of our everyday routines. While some customers may opt for the simpler Essentials range, there is also a part of the market that will want something with a little more flavour. This is where the products I’m designing will sit.”

All Westpac customers with an everyday banking account eligible for a Debit Mastercard® will be able to order a PayWear Card online via Westpac Live, which can be inserted into the PayWear accessory of their choice. The PayWear Essentials range of wristband and keeper will be available from December. The Designer range is due to be available to customers in early 2018.

Westpac customers will be able to use PayWear to make purchases on all contactless-enabled terminals.

“Unlike many other wearable payment options, our customers don’t require an expensive device to access this technology. Customers will be able to get a PayWear Essentials accessory free of charge for a limited time, making it accessible to all our everyday banking customers,” Mr Frazis said.

The announcement of PayWear builds on the Westpac Group’s strong history of digital innovation, as the first to introduce internet banking to Australia, and the first in the world to deliver fingerprint sensor technology (Touch ID) to mobile banking logon in 2014.

Westpac to refund some package customers, costs $65m

Westpac has announced it would provide refunds to some customers holding ‘packaged’ accounts after identifying that some customers did not automatically receive benefits to which they were entitled.


The issue affected approximately 200,000 customers who held Premier Advantage Packages with Westpac or Advantage Packages with St. George, BankSA, or Bank of Melbourne from 2010.

Under the terms of the packages, customers were entitled to a range of benefits. Customers automatically received discounts on core products such as home loans, credit cards, or transaction accounts. However, some customers did not receive discounts on ancillary products such as home and contents insurance and term deposits. The packages have since been simplified and all benefits are now automated.

Westpac Chief Executive, Consumer Bank, George Frazis, said: “At Westpac, our business depends on building long term relationships with our customers. So when we get something wrong, we want our customers to have confidence that we will put it right.

“When we identified these issues we started the process of putting things right for customers. We also notified ASIC.

“Importantly, customers do not need to do anything. Over the coming months, we will provide refunds, including appropriate interest, to any customers who may have been entitled to a benefit but weren’t aware they needed to opt in.

“Westpac apologises unreservedly for a process that did not suit customers. By automating the discounts, we have ensured that our customers will not be affected in this way again.”

Mr Frazis said that some customers with various business banking packages may also not have received some of the benefits they were entitled to. Affected customers will also receive refunds.

Refunds are expected to total approximately $65 million with an after tax cost to Westpac of around $45 million, which will be included in Westpac Group’s FY17 financial results.

Westpac will proactively contact eligible customers, but has set up a dedicated webpage to assist with any questions. Business customers can also contact their relationship banker directly.

No maths formula for rate repricing: Westpac

From Australian Broker.

There is no document or formula that exists behind Westpac’s decision to raise interest-only loan rates in light of lending speed limits imposed by the Australian Prudential Regulation Authority (APRA).

Instead, the bank has said differentiating rates between interest-only and principal and interest loans have been made as a “judgment”.

These claims came to light when Westpac’s CEO Brian Hartzner and chief financial officer Peter King faced the House of Representatives Standing Committee on Economics in its review of Australia’s four major banks in Canberra yesterday (11 October).

The bank made estimates around what the size of the gap between IO and P&I rates would be, Hartzner said. While forecasts were made around these changes, it was difficult to see exactly what would happen as it was impossible to accurately guess how many customers would switch mortgage types.

“It’s not a mathematical formula, it’s a judgment,” he said.

While there was no physical documentation that exists around different price points, Hartzner admitted the bank would have modelled around profitability and rate changes.

“Obviously we consider commercial issues in the things we do.”

When committee chair David Coleman questioned whether regulation was being used to boost bank profits, Hartzner outright denied this.

“I would reject the idea that compliance is a profit centre.”

Westpac spends $300m to $400m per year on compliance – fees which the bank was not going to recuperate, he said.

Profit was not a primary driver for these changes, he said, stressing that the main push was to manage Westpac’s balance sheet.

At the moment, around 50% of Westpac’s existing loan book consists of IO loans.

Hartzner’s message to borrowers was simple.

“Switch to a principal and interest loan. It’s cheaper.”

… As Does Westpac

All the major banks have removed foreign ATM fees. The ABA welcomed the move.

Statement from Anna Bligh, Australian Bankers’ Association Chief Executive:

“The ABA welcomes the announcement from the major banks today to abolish ATM fees.

“It’s a boon for customers and makes banking more affordable for everyday Australians.

“This is the latest in a suite of initiatives by banks to create better products and services for customers and boost customer choice, including reducing interest rates on credit cards and offering fee-free transaction accounts.

“A competitive banking system is good for customers and good for the sector.”